What's Behind China's Banking Reforms?

09/20/2013 10:00 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

There are quite a few dramatic changes going to be tightening up Chinese banking says Moneyshow's Jim Jubak, but he wonders if it's a positive sign or not.

If you bought a new car and it came without seatbelts or air bags, you have two possible reactions; one is utter a horror because this is a death trap, and the other is, "huh, interesting, they built a safe enough car so they don't need these things."

This isn't about cars, it's about China and what's going on there right now. The Chinese are doing a lot of really, really important safety work on their financial system. They've prodded their banks, not the biggest ones which have already raised a lot of money, but, sort of, the next level down, to go to the capital markets, and to raise more so they have more in reserves, so that the reserve ratios, the standards for how much you have aside, for how much you lend, are headed up to 12% or so.

They've also done a lot of work with the existing bad banks. These were banks that were set up after the 1997 Asian Currency Crisis to absorb a lot of bad debt that the banks had built up, so basically the banks sold the bad debt to these bad banks. These bad banks then issued bonds that the good banks bought, but it took all that bad debt off the bank's balance sheet. Some of these, strangely enough, have actually survived to the present term.

What they're doing right now is, many of them, are actually gussying up their books enough so they can go public. If you think about why they're doing that, what this really does is, gives the Chinese governments a lot of entities out there that aren't banks, that are capable now of taking bad bank debt off of bank balance sheets and having enough capital to absorb that. You have a lot of activity going on that seems to be designed to deal with the problem that bad loans are indeed rising in China.

These are both areas where the Chinese government looks like it's decided that it wants to address this before it becomes a real problem, so you can say, "Okay, so this car, this financial car, comes with seatbelts and an air bag." On the other hand, you can also say, "Oh, if there wasn't a really big problem, China wouldn't be doing this so maybe I have to worry about this. I think it's both. I think this is really a big problem. China is worried. You should think about it before you put money into a Chinese bank, or anything that's really connected to the Chinese financial system right now. I'd like to see this work, though. On the other hand, it's really good news that China is dealing with this problem before it becomes a crisis, because once it's a crisis, it becomes a whole lot harder to raise the money that you need to support a financial system.

This is Jim Jubak for the MoneyShow.com video network.

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